High Court restrains enforcement of judgment debt in light of a Scheme of Arrangement
September 11, 2023

High Court restrains enforcement of judgment debt in light of a Scheme of Arrangement

The High Court in AirAsia X Berhad v. PK Agro-Industrial Products (M) Sdn. Bhd. [2023] 1 LNS 1373 recently granted a Fortuna injunction to restrain the presentation of a winding-up petition on the grounds that a judgment debt had been compromised under the terms a scheme of arrangement despite the judgment in default having not been set aside.

The dispute arose from AirAsia X’s (“AAX”) purported inability to pay for the supplies provided by the Defendant during the Covid-19 pandemic. The Defendant commenced an action to recover damages and thereafter entered a judgment in default against AAX on 5 February 2021 (“the JID”).

Before the JID could be enforced or set aside, AAX obtained an order under s. 368 Companies Act 2016 to restrain legal proceedings pending the approval of its scheme of arrangement by its creditors and the Court. The scheme of arrangement was approved by the requisite statutory majority of AAX’s creditors on 12 November 2021 and it was thereafter sanctioned by an Order of the High Court dated 16 December 2021 (“Sanction Order”).

The scheme of arrangement came into effect, pursuant to s. 366(5) Companies Act 2016, upon the lodgement of the Sanction Order with the Registrar of Companies on 16 March 2022. On 7 April 2022, AAX’s solicitors accordingly notified the Defendant’s solicitors that there was no longer any basis to enforce the JID as it would be settled pursuant to the terms of the scheme of arrangement.

Notwithstanding this, and on 21 February 2023, the Defendant issued a Statutory Notice pursuant to s. 465(1)(e) Companies Act 2016 to demand that AAX pay the JID debt under the pain of being wound-up.

AAX consequently filed an Originating Summons in the High Court for declaratory relief that the JID debt had been compromised under the scheme of arrangement (“Declaratory Relief”) and injunctive relief to restrain the presentation of a winding-up petition (“Injunctive Relief”).

In granting the Declaratory Relief, the High Court applied the principles outlined by the Federal Court in Hassan bin Marsom v. Hady Bin Ya'akop [2018] 7 CLJ 403; [2018] 5 MLJ 14 and held, inter alia, that “[t]he Defendant's contention that the Statutory Notice is not correct as the Scheme of Arrangement fully and irrevocably satisfied and discharged the JID Debt, binding the Defendant”.

With regard to the Injunctive Relief sought by AAX, the Defendant contended that the test for Fortuna injunctions was not satisfied as it had not participated in the voting process to approve the scheme of arrangement and because there was no bona fide dispute over the judgment debt by reason of AAX’s failure to set aside the JID upon obtaining the Sanction Order.

The High Court nevertheless granted the Injunctive Relief and held, inter alia, that:-

(1) the Defendant’s failure to vote at the Court Convened Creditors’ Meeting did not diminish the binding nature of AAX’s scheme of arrangement as it had attained “approval by a majority vote and a court order” in accordance with s. 366(3) and s. 36(4) Companies Act 2016 (at para. [6]);

(2) the scheme of arrangement, being a statutory arrangement and not an ordinary contract, overrides the requirement of individual consent and mandates that all creditors will be bound where the requisite majority of creditors have agreed to it (at para. [6]);

(3) the fact that the debt has been settled after judgment did not provide grounds for the setting aside of the JID. AAX’s reliance on the scheme of arrangement to prevent the filing of a winding-up petition was thus “legally valid” (at para. [11]); and

(4) the Defendant’s intended winding-up petition would have caused irreparable damage and hindered AAX’s operations due to “the negative impact on the Plaintiff’s share price, its PN 17 regularisation plan, financing opportunities, and material contracts” (at para. [16]).

In ruling in favour of AAX, the High Court also observed that the Defendant’s issuance of a Statutory Notice to demand for the full payment of the JID debt was “contrary to the Scheme of Arrangement, a collateral attack on the Sanction Order and an attempt to gain an undue preference over the Plaintiff’s other creditors”.

Jeremiah Rais and Ilyssa Jace of Messrs. Steven Thiru and Sudhar Partnership acted for AAX in the High Court.

More News